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Bitcoinomics Chapter 18: Conclusion

[heading]Bitcoinomics Chapter 18: Conclusion[/heading]

As Trace Mayer points out, if Bitcoin enjoys the same success as Skype, then it will become a 8 billion dollar market cap in about six years. That means that each Bitcoin will be worth about $800.

Unlike Skype, Bitcoin participants will get to taste that growth in the form of appreciation they hold, control or own. As Trace laments, Skype never paid him a dime for being one of their first 50,000 users. The theory of network effect has implications for the future of Bitcoin. Some people believe Bitcoin will be supplanted by competition by other virtual currencies. But, the network effect can be seen in effect with immaterial goods, thus pointing towards Bitcoin longevity.

For instance, there are a small number of general purpose operating systems (Windows, iOS, Linux), a small dominant number of languages (Mandarin and English most widely spoken, then Spanish and Hindi next, and those four account for about half of the world population, approximately.  There is one general purpose communication protocol in the internet. Sure, things can metastasize within these spaces, but this generally takes much time.

The network effect also predicts path dependence. Or, in other words, the order in which choices are made affect the end result.  Bitcoin, under this line of reasoning, then has first mover advantage.

Will government move to regulate alternative currencies? One can only conjecture that, yes, eventually government will move to contest alternative currencies such as Bitcoin as being treasonous or counterfeit or fraudulent or terrorism.  At the very least, regulated by AML and KYC legislation.

We have seen this in the case of Von Nothaus, who coined “Liberty Dollars,” which the US recently deemed a form of counterfeit. To be sure, he used the actual dollar symbol and was an outspoken proponent of undermining US dollar strength. The thing it seems with Bitcoin is that it would be very, very difficult to prevent from flourishing. Some believe the state does have the computer technology available to to infiltrate a system as elaborate as Bitcoin, while others either believe they do not have the technology or the organization to compromise it meaningfully.

Some believe they might not yet, but one day will. The methods available to the government depend on the security of private websites interacting within the overarching Bitcoin network.

For example, private websites on a hosted server can be demanded to be taken down. The server, not affiliated with the Bitcoin website, must comply or face penalty.

It should be assumed that the government can take down any website it wishes. But, websites can be mirrored, copied and saved easily. The publicity brought to Bitcoin by government attempts to control it will create an arm’s race in which not only does the government and other monied-interests try to take out Bitcoin websites in more wide-ranging and effective ways, but so too will Bitcoin followers then race to create new Bitcoin innovations.

What does surely happen in such a scenario is that Bitcoin will become more well-known and perhaps more widely used even. Despite this assumption, that the government can take down whatever website it pleases, certain sites have not been so easily taken down.

In fact, Silk Road has proven thus far impossible to take down, even if Tor has in some ways been compromised.

So, if aboveground Bitcoin websites are all attacked and muted, the underground Bitcoin economy will flourish, and perhaps even propel prices due to the supply issues.  To be sure, i’d rather stick to straight cash transactions in this case. But, since the majority of Bitcoin users do not participate in illicit transactions,

the majority have little to concern themselves over.


A government could prohibit business and individuals from transacting in Bitcoin, but who cares?

They can’t trace the bitcoins and would have to develop some new space-age technology to detect the radius of Bitcoin transactions, and even then, how are you going to know which individuals hold Bitcoin in a packed city subway?

While the price might fall due to a drop in demand, the Bitcoin economy will surely persist. While centralized systems such as PayPal, Visa and others can be shutdown, the Bitcoin network is not susceptible to such an unfolding. MP3 file sharing has demonstrated as much.

There is no central command for Bitcoin. Nobody is responsible for Bitcoin, and those who transact in bitcoins do not necessarily own the bitcoins, they just control the bitcoin wallet holding the bitcoins.

Transactions are between two parties, peer-to-peer, so no third party or governing body must approve them. Accounts do not get frozen, for nobody holds that power  as it is not a sequence in the overall Bitcoin algorithm. If Bitcoin does not fail, then it will be thrust into a situation where it could reasonably supplant the dominant financial system as we know it today. Many of the burdensome and Too Big to Fail institutions of today might go extinct in a world of alternative currency.

At the very least, we will watch them adapt before our very eyes. The first businesses to feel the burn of Bitcoin competition would be the status-quo in current money transfers, such as PayPal and Western Union, as well as SWIFT.

How will they compensate their business models when they are competing with Bitcoin, a thing that transfers value at virtually zero cost? In fact, the main service of these companies will be made redundant. That will mean that customers have billions of more dollars in their pocketbooks each year, making them more likely to venture into economic independence by starting their own (perhaps Bitcoin-centric?) businesses and investing their money for their futures.

Humanity will also gain the energy resources freed up by the ease of transaction offered by the Bitcoin network. Just like cars enriched humanity by lowering the cost of transportation, and Email by cheaper and faster communication, Bitcoin can make the world richer by enabling instant money transfers at low cost.

In a Bitcoin market big enough to supplant old school financial transaction networks, the volatility will lessen and Bitcoin will become an even better solution for store of value and money transfer.

The next to go are central and commercial banks and then national currencies altogether.  All bank work can be done within the Bitcoin framework.

Banks will be diminished, and they will now perform services to cure demand, and not simply because their services face no competition due to government cronyism.

In the world of Bitcoin, to be certain, banks would still exist: people would still want loans and lots of services provided by banks. But, these banks would not grow dependent upon taxpayer money and fleecing their customers like the banks of today.

One thing banks could offer in a world of alternative currencies is safe and secure placement for funds. That is, a customer could pay insurance on his or her Bitcoin account and thus, in the event of fraud or error, be entitled to recompense. But, of course a regular old insurance company could do the same thing for those bitcoins held on a home PC. Bitcoin, or any populist driven alternative currency,  quickly leads the populations of the world to question national sovereignty in money printing matters.

Just like people left the recording industry supply-chain in favor of free music, people again would leave the dominant banking system and nation-states in favor of free banking.

The true question is whether or not Bitcoin can represent a reasonable store of value over time. If this question is answered in the positive, then there is virtually no reason to stick with fiat currencies of nation-states and superstates such as the European Union. The worst case scenario is that they attempt to destroy bitcoin itself, and there are numerous strategies they could use. But the point is, the idea will never die. Even if bitcoin dies, an alternative will rise, one that addresses the vulnerability that was previously exploited in the Bitcoin version of decentralized cryptographic technologies.

Then you get Bitcoin 2.0.  It’s not about how much bitcoin is worth. The exchange rate is irrelevant. It’s about the concept of a peer-to-peer ledger keeping system.  In the case of BitTorrent,  billions have been spent fighting it and failed. BitTorrent is still rampant. In the case of Bitcoin, could the same true?

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